I have written about ancient places, warzones, political upheavals and far frontiers for the Wall Street Journal and Newsweek since the 1990s. That covers an area from the China-North Korea border to the Caucasus, to Iraq, Iran, Syria, Turkey to Eastern Europe. Submerging markets.

An Injection Of Rule Of Law For Ukrainian Business? Oligarch's Lawsuit Could Help Improve The Culture Of Business Dealings In The Post Soviet Space

The last decade has been a difficult one for Ukraine. After the brief, hopeful days of its Orange revolution in 2004 and 2005, the country first saw the Orange leaders disappoint expectations and then self-destruct in a bitter feud. Ultimately, national affairs slid backwards into gridlock, authoritarianism and questionable government practices. Still, the potential signing of an association agreement with the EU in late 2013 could provide some hope. Can the rule of law and Western-style democracy take hold there? Oddly enough, a court case in England might provide some of the answer.

London is now home to another large-scale litigation suit between oligarchs from the former Soviet Union. Victor Pinchuk, the founder of the pipe and wheel producer Interpipe and the investment vehicle EastOne, is suing Gennadiy Bogolyubov and Igor Kolomoisky, business partners and co-founders of Privat Group. Why should Western societies care about this case? Because it carries significance beyond the dispute itself.

Ukraine needs a business climate where agreements are fulfilled, investments are secure, courts take independent decisions regardless of who the claimants are. Then international investors will flow in, small and medium business will develop, competition will foster innovation and efficiency, and the country will finally be able to fulfill its vast potential. To get there is a step-by-step process, working with imperfect material – as Ukrainian business was created in muddy circumstances. Any step forward is to be welcomed, and the London court struggle could be a crucial one.

None of the men involved in this suit are perfect –not by any means. Most people understand that rising out of the post-Soviet collapse to become an oligarch required questionable dealings, however decent your intentions. But meanwhile, Ukrainian business has evolved, and so have its protagonists, albeit some more than others. Ukraine could be at the threshold of a more benign business environment – if a more “Western” way of doing business and resolving conflicts can gain ground.

An independent lawsuit between powerful players will not only be fascinating, because it sheds light on how Ukrainian business empires were created. It can also set a powerful precedent for solving corporate conflicts fairly and transparently.

Pinchuk’s suit, currently in English High Court, stems from an alleged breach of contract and breach of trust by the duo, Bogolyubov and Kolomoisky.

The nature of Pinchuk’s claim is simple: Bogolyubov and Kolomoisky are holding Pinchuk’s property illegally. Pinchuk’s suit asserts that they sold him a shell company, Alcross Commercial Ltd., for $143 million in 2005. They told Pinchuk that Alcross owned Krivorozhskiy Zhelezorudnyy Kombinat (KZhRK), a Ukrainian ore-mining company. In reality, Alcross was worthless. They have continuously promised to transfer the assets of KZhRK to Pinchuk but failed to do so—and then, in 2007, they turned around and sold about 50 percent of KZhRK to a third party. They thus sold a stake in a business they did not own.

Written evidence in the case is by no means extensive, it being common practice in the post Soviet time to do business in that way. The prima facie arguments in the claim look coherent enough to go to court. Bogolyubov’s lawyer declared that his client regards the claim “as misconceived and will be vigorously defending it.” The truth will come out only during the court proceedings. This will surely be fascinating to watch because, as I made clear earlier, there are colorful people involved in the dispute.

Bogolyubov and Kolomoisky fostered strong reputations as corporate raiders in the mid-2000s, becoming notorious for a series of hostile takeovers. Hostile takeovers Ukrainian style, that is, which often included the active involvement of Privat’s quasi-military teams. These schemes included, among others, a literal raid on the Kremenchuk steel plant in 2006, in which hundreds of hired rowdies armed with baseball bats, iron bars, gas and rubber bullet pistols and chainsaws forcibly took over the plant. More recently, Aerosvit Airlines, which according to the media was controlled by Mr. Kolomoisky, declared bankruptcy in 2012, stranding thousands of Ukrainians in Ukraine and abroad. The Financial Times, when reporting on Kolomoisky’s recent conflict with UK company JKX Oil & Gas, stated in no uncertain terms, that “in Ukraine they [Kolomoisky and Bogolyubov] are called ‘The Raiders’”.

Privat Group has been involved in several court cases and arbitration proceedings in the US, UK, and Sweden. In 2009, a US court made clear its distrust of Privat representatives: “the Court has become increasingly skeptical of these gentleman [at Privat] and the credibility of their statements.”

Also, Bogolyubov has been involved in a lengthy dispute with OMH Holdings, an Australian mining company, over the attempted merger with his own Consolidated Minerals. To quote OM Chief Executive Peter Toth: “It is clear to me that ConsMin is prepared to exhaust an endless supply of legal and corporate antics to frustrate, slow down, undermine and de-stabilise the company from executing its strategic initiatives at a critical point in time, in order to pursue their own individual agenda and achieve their own strategic objectives.”[1]

Mr. Pinchuk himself has been accused of questionable practices, mostly alleged favoritism from his close association with former President Leonid Kuchma – his father in law. When Pinchuk and Rinat Akhmentov won the public tender for the state-owned steel plant, Kryvorizhstal, in 2004, Kolomoisky claimed favoritism. Following the election of former President Victor Yushchenko, then-Prime Minister Yulia Tymoshenko renationalized Kryvorizhstal and held a new privatization tender in 2005 – a decision that Pinchuk and Akhmentov currently have on appeal in the European court.

Kolomoisky and Bogolyubov also claimed they had been excluded from the bidding process for another state company, the Nikopolsky Ferroalloy plant, because Pinchuk used his close relations to the President to make sure his own bid would be successful. When Pinchuk acquired the Nikopolsky plant, they not only challenged the privatization in court – unsuccessfully. They also tried a violent takeover that was rebutted by workers protecting the plant.

Pinchuk has refuted allegations of favoritism and insisted he played by the rules and did not have more favorable conditions than other big businesspeople in Ukraine at the time. While he admitted in an interview, unusually for a Ukrainian businessman, that as the President’s son in law he maybe should have stayed away from the deal, he claimed it was legal and the price paid was relatively high compared to other privatizations. But the above allegations do show that there have been questions raised about how Pinchuk has operated.

So all of the men in involved in this suit have had questions raised about their actions in the past, albeit different ones. In the end, though, what matters most is their standard of conduct from that time to the present, and potentially into the future. Not least because it will determine whether or not the world wants to do business with Ukraine.

Kolomoisky and Bogolyubov also made headlines more recently – trying to “export” their professional practices abroad, practices that endure from the muddy post-Soviet transition era, flabbergasting Westerners who have been affected.

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